texas gulf sulphur insider trading

(258 F.Supp. [22] Finally, we note that this position is not, as asserted by defendants, irreconcilable with previous language in this circuit because "some form of the traditional scienter requirement," Barnes v. Osofsky, 373 F.2d 269, 272 (2 Cir. 3230 (May 21, 1942) ("The new rule closes a loophole in the protection against fraud administered by the Commission by prohibiting individuals or companies from buying securities if they engage in fraud in their purchase. 9323 stated: Section 10(b) of the Act (see footnote 8, supra) was taken by the Conference Committee from Section 10(b) of the proposed Senate bill, S. 3420, and taken from it verbatim insofar as here pertinent. 258 F. Supp. [11] We are not, of course, bound by the trial court's determination as to materiality unless we find it "clearly erroneous" for that standard of appellate review is applicable only to issues of basic fact and not to issues of ultimate fact. Judge Bonsal in a detailed opinion[5] decided, inter alia, that the insider activity prior to April 9, 1964 was not illegal because the drilling results were not "material" until then; that Clayton and Crawford had traded in violation of law because they traded after that date; that Coates had committed no violation as he did not trade before disclosure was made; and that the issuance of the press release was not unlawful because it was not issued for the purpose of benefiting the corporation, there was no evidence that any insider used the release to his personal advantage and it was not "misleading, or deceptive on the basis of the facts then known," 258 F.Supp. (6) As to Fogarty, Mollison, Holyk, Darke, and Huntington, as purchasers of stock or calls thereon between November 12, 1963, and April 9, 1964, we reverse the dismissal of the complaint and find that they violated 15 U.S.C. 239 (SDNY 1962). Dasho v. Susquehanna Corp., 380 F.2d 262 (7 Cir. ), cert. While such an erroneous view of the law is pardonable, it is not "good faith" in a legal sense. 972 (S.D.N.Y. If the SEC had appealed the ruling dismissing this portion of the complaint as to Holyk and Mollison, I would have upheld the dismissal quite apart from the special circumstance that a refusal on their part could well have broken the wall of secrecy it was important for TGS to preserve. 258 F.Supp. The case was tried at length before Judge Bonsal of the Southern District of New York, sitting without a jury. cases. Meanwhile, rumors that a major ore strike was in the making had been circulating throughout Canada. LAW OF CORPORATE MANAGEMENT AND FINANCE LGST Legal Studies & Business 80, 17 L.Ed. These results were so remarkable that neither Clayton, an experienced geophysicist, nor four other TGS expert witnesses, had ever seen or heard of a comparable initial exploratory drill hole in a base metal deposit. 2Andrew Beattie, "Top 4 Most Scandalous Insider Trading Debacles . The company's initial survey showed evidence of massive deposits of copper and zinc, so Texas Gulf quietly acquired the surrounding property. insider trading law by trading securities (without disclosure) based on material, non-public information. The President, Claude O. Stephens, the Executive Vice-President, Charles F. Fogarty, and the Exploration Vice President, Richard D. Mollison, were notified, and Fogarty and Mollison flew to the drill site. I understand that the Commission has conducted, or is conducting, hearings to enable it to learn the views of the many persons and corporations affected. at 288; his defense was rather a belief that the law required him only to await its issuance. Incorrect Mark 0 out of 1. Texas Gulf, utilizing a geological survey, was conducting mining exploration in Canada. Since I believe that the findings of the trial court are solidly founded and should be respected, I agree with its decision as to Crawford and Clayton. But disclosure of the "results", namely, preliminary visual inspection of the contents, would have violated the Commission's own rules and standards. On October 29 and 30, 1963, Clayton conducted a ground geophysical survey on the northeast portion of the Kidd 55 segment which confirmed the presence of an anomaly and indicated the necessity of diamond core drilling for further evaluation. See 3 Loss, Securities Regulation 1692-96 (1961). Here the trial court had an opportunity not only to hear the qualifications of the experts but also from their demeanor and responses to form its opinion as to their credibility. SEC v. Texas Gulf Sulphur, in which officers of Texas Gulf Sulphur learned of their company's rich ore strike in Canada and traded on this information before the news became public. At this time, neither the TGS Stock Option Committee nor its Board of Directors had been informed of the results of K-55-1, presumably because of the pending land acquisition program which required confidentiality. Texas Gulf Sulphur Co., 401 F. 2d 833 (2d Cir. If they are not disclosed, the corporation is concealing information; [889] if disclosed and hoped-for results do not materialize, there will always be those with the advantage of hindsight to brand them as false or misleading. Here, notwithstanding the trial court's conclusion that the results of the first drill core, K-55-1, were "too `remote' * * * to have had any significant impact on the market, i. e., to be deemed material,"[11] 258 F.Supp. United States Court of Appeals Second Circuit. Significantly, however, the court below, while relying upon what these defense experts said the defendant insiders ought to have thought about the worth to TGS of the K-55-1 discovery, and finding that from November 12, 1963 to April 6, 1964 Fogarty, Murray, Holyk and Darke spent more than $100,000 in purchasing TGS stock and calls on that stock, made no finding that the insiders were motivated by any factor other than the extraordinary K-55-1 discovery when they bought their stock and their calls. Moreover, it should be possible for officers to communicate with directors, of all people, without fearing a breach of confidence. at 271). 10 (1942). (2) Was the TGS press release of April 12, 1964, false, misleading or deceptive within the meaning of Section 10(b) and Rule 10b-5 in the light of TGS' then knowledge and the then existing factual situation. Fighting insider trading is clearly at the top of law enforcement's agenda. syllabus LGST 2020-8020 s2023 v.4 1 .pdf - AS OF: MAR. 1070, 1075, 1076 n.29 (1965), the securities laws should be interpreted as an expansion of the common law[21] both to effectuate the broad remedial design of Congress, see SEC v. Capital Gains Research Bureau, supra, 375 U.S. at 195, 84 S.Ct. Yet the requirement of hourly bulletins to the press from the conference room would not be compatible with common [876] sense. Thank you. 1968). The only difference of substance between 17(a) and Rule 10b-5 is that the latter applies to purchasers as well as sellers. The first is a situation that will not often arise, involving as it does the acceptance of stock options during a period when inside information likely to produce a rapid and substantial increase in the price of the stock was known to some of the grantees but unknown to those in charge of the granting. A correct decision in this case may well hang upon [872] their testimony and its credibility because what these observers knew or should have known between November 12, 1963 and April 9, 1964 is basic to a determination of what, if anything, should have been disclosed or whether it was "material. Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540, 547, quoting from SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 193, 84 S.Ct. [30] Though the Board of Directors of TGS ratified the issuance of the options after the Timmins discovery had been fully publicized, it obviously was of the belief that Kline had committed no serious wrong in remaining silent. 258 F.Supp. at 296 (emphasis supplied) rather than from an appropriate primary inquiry into the meaning of the statement to the reasonable investor and its relationship to truth. To Catch a Thief: The Misappropriation Theory and Securities Fraud We do intend to convey, however, that where a corporate purpose is thus served by withholding the news of a material fact, those persons who are thus quite properly true to their corporate trust must not during the period of non-disclosure deal personally in the corporation's securities or give to outsiders confidential information not generally available to all the corporations' stockholders and to the public at large. And, I concur in as much as Part II of Judge Friendly's opinion as discusses the origins of the rule and the relevance of today's decision involving only an application by the S.E.C. Where The Market Was This is unfortunate because it has resulted in 10(b) being given a construction and significance which, in my opinion, Congress did not foresee and did not intend. We disagree. 1962) (lack of diligence is all that is required for conviction in a criminal prosecution for violation of 17(a) of the 1933 Act.). D. Rule 10b-5 Occupies the Field: Texas Gulf Sulphur 396 R E. Insider Trading Retrenchment and Renewal 402 R II. 240.14a-101-103. H. L. Green Co. v. Childree, 185 F.Supp. denied, 382 U.S. 811, 86 S.Ct. 78n, the Commission has promulgated proxy rules setting forth information that must be sent to shareholders prior to their annual or other meetings. A remand on this point is therefore not justified. [20] The SEC seeks permanent injunctions restraining future proscribed activity by all the individual defendants and the corporation. 78ff) provisions. Albert R. Connelly, Donald I. Strauber, Cravath, Swaine & Moore, New York City, for Coates. These regulations vary across countries, but generally require disclosure of such information and impose penalties for violations. It requires no imagination to venture that such announcements might well have had the "wildest" impact on the market price of TGS stock. Id. 10, and the Commission wished to make it emphatically clear that the Rule was expected, inter alia, to close this loophole. c. bribery. The majority disagree as to Kline, placing him in top management along with Stephens and Fogarty, and holding that he had sufficient knowledge that his non-disclosure violated Rule 10b-5. Texas Gulf Sulphur Co., 401 F.2d 833, 848 (2d Cir. Kidd 55 was only one of several thousand anomalies (areas where there is unusual variation in the electrical conductivity of rocks) that TGS detected in its aerial exploration of the Canadian shield. Texas Gulf Sulphur Co. (1966), a federal circuit court stated ,that anyone in the possession of inside information must either disclose information or . 1961). We have recently stated in a case involving a private suit under Rule 10b-5 in which damages and an injunction were sought, "`It is not necessary in a suit for equitable or prophylactic relief to establish all the elements required in a suit for monetary damages.'" Fleischer, Securities Trading and Corporate Information Practices: The Implications of the Texas Gulf Sulphur Proceeding, 51 Va.L.Rev. See SEC v. Electrogen Industries, Inc., 68 Civ. 95 (S.D.N.Y. 77q(a) which is almost word for word the same except for the explicit requirement that any alleged fraud be associated with "the offer or sale of * * * securities." See List v. Fashion Park, Inc., 340 F.2d 457, 461-62 (2 Cir. 26 (SD NY 1964); but see, e. g., Weber v. C. M. P. Corp., 242 F.Supp. Beyond this, a rule imposing civil liability in such cases would work directly counter to what the SEC has properly called "a commendable and growing recognition on the part of industry and the investment community of the importance of informing security holders and the public generally with respect to important business and financial developments." However, the rumors and casual disclosure through Canadian media, especially in view of the April 12 "gloomy" or incomplete release denying the rumors and promising official confirmation, hardly sufficed to inform traders on American exchanges affected by Crawford's purchases. Moreover, adequate incentives for corporate officers may be provided by properly administered stock options and employee purchase plans of which there are many in existence. Such a deceptive or manipulative practice would be prohibited by 10(b) and Rule 10b-5. PDF The Ethics of Insider Trading Reform - Mercatus Center Section 10(b) was certainly not intended to be a mandate to the Commission to erect a comprehensive regulatory system policing all corporate publicity, as the majority now contend. During the period of drilling in Timmins, the market price of TGS stock fluctuated but steadily gained overall. The specific SEC allegation in its complaint is that this April 12 press release "* * * was materially false and misleading and was known by certain of defendant Texas Gulf's officers and employees, including defendants Fogarty, Mollison, Holyk, Darke and Clayton, to be materially false and misleading. Plaintiff, the Securities and Exchange Commission, brought this suit against Defendants, Texas Gulf Sulphur Co., et al., after Defendants bought shares . 1070, 1079. July 28, 2022 David Bissinger 2023 The Texas Lawbook. Similarly, corporate officers or directors may be liable for causing their corporation to engage in securities transactions. (4) As to Stephens and Fogarty, as recipients of stock options, we reverse the dismissal of the complaint and remand for a further determination as to whether an injunction, in the exercise of the trial court's discretion, should issue. The foregoing discussion demonstrates that Congress intended to protect the investing public in connection with their purchases or sales on Exchanges from being misled by misleading statements promulgated for or on behalf of corporations irrespective of whether [861] the insiders contemporaneously trade in the securities of that corporation and irrespective of whether the corporation or its management have an ulterior purpose or purposes in making an official public release. The primary legal issue in substance is what duty, if any, rested upon the purchasers to disclose the knowledge they possessed at the time of purchase. The trial court, accepting the Commission's experts' version, fixed 7:00 p.m. on April 9, 1964 as the time when TGS had material information which "if disclosed, would have had a substantial impact on the market price of TGS stock" but also found that "the drilling results up to 7:00 p.m. on April 9th did not provide such material information." On Saturday morning, April 11th, both the New York Herald Tribune and the New York Times prominently reported a major ore discovery. 301 (SDNY 1966); Cochran v. Channing Corp., 211 F.Supp. The majority says that negligent misstatement by a corporation is enough for injunctive relief under Rule 10b-5 (2) in a proper case; it reserves the question, not here presented, whether the corporation is liable for damages. Before further discussing this matter it seems desirable to state exactly what the SEC claimed in its complaint and what it seeks. His awareness of the contents of the April 12 release renders unreasonable any claim that he believed the news was truly public. If Judge Bonsal had denied a injunction on these grounds, I see no basis on which we could properly have reversed him. was "the first federal court decision to ad-dress insider trading of securities under 10(b) of the Securities Exchange Act of 1934 and This assumption raises the question of what is material and who is to make such a determination. 258 F.Supp. by Brian JM Quinn ANNOTATION DISPLAY The following case, Texas Gulf Sulphur is an early federal insider trading case. These individuals thereafter acquired TGS stock and calls. Since the issue of negligence is open to full review, Mamiye Bros v. Barber SS. 78j) which provides: [882] Pursuant to this authority the Commission in 1942 promulgated Rule 10b-5 (17 C.F.R. 792, 73rd Cong., 2d Sess. From Mollison Fogarty had been told of the developments through 7:00 P. M. on April 10, and of [846] the remarkable discoveries made up to that time, detailed supra, which discoveries, according to the calculations of the experts who testified for the SEC at the hearing, demonstrated that TGS had already discovered 6.2 to 8.3 million tons of proven ore having gross assay values from $26 to $29 per ton. d. pay secrecy Feedback The correct answer is: insider trading. at 294. 16(b) of the Act. It seems to me clear that the injunction sought by the Commission should be granted. H.R.Rep.No. 6 . Holyk left for New York Saturday morning and arrived that same day. 724 (E. D.Pa.1966) (Brokerage house liable to plaintiff if it failed to supervise adequately one of its employees who allegedly was guilty of "churning" or excessive turnover in plaintiff's account.). These operations resulted in the detection of numerous anomalies, i. e., extraordinary variations in the conductivity of rocks, one of which was on the Kidd 55 segment of land located near Timmins, Ontario. Coates was absolved by the court below because his telephone order was placed shortly before 10:20 A.M. on April 16, which was after the announcement had been made even though the news could not be considered already a matter of public information. Here there is no danger of repetition of an unduly gloomy press release like that of April 12. "Shadow Trading" Becomes Insider Trading By Stephen J. Crimmins March 28, 2022 1 Comment On January 14, 2022, the U.S. District Court in San Francisco denied a motion to dismiss charges filed by the Securities and Exchange Commission under an expansive new theory of insider trading liability. In their opinion, the majority have become so involved in usurping the function of the trial court, in selecting the witnesses they (at variance with the trial court) choose to believe, in forming their own factual conclusions from the evidence (in disregard of Rule 52 (a)), in deciding with, of course, the benefit of the wisdom of hindsight, how they, had they been executives of Texas Gulf Sulphur Company (TGS), would have handled the publicity attendant to the exploration of the Timmins property, in determining (to their own satisfaction) the motives which prompted each of the individual defendants to buy TGS stock and in becoming mining engineering experts in their own right, that I find it desirable in fact, essential to state my opinion as to the fundamental jurisdiction of the Court of Appeals and the issues properly before us. Texas Gulf Sulphur Co., 401 F.2d 833, 848-49 (2d Cir. 275, and to insure uniformity of enforcement, see Note, 32 U.Chi.L.Rev. Solved Develop the argument that Martha Stewart was not - Chegg However, even if it were not possible to evaluate and transmit current data in time to prepare the release on April 12, it would seem that TGS could have delayed the preparation a bit until an accurate report of a rapidly changing situation was possible. In, "Securities and Exchange Com'n v. Texas Gulf Sulphur Co.". at 282. LaThis article found in the Wall Street Journal applies to insider trading. Legal Depts. In so holding, they confuse the inducing motive of the individual purchaser with knowledge of material [877] facts which ought to be revealed to the public at large. at 1115 (citing SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir.1968)). Premature announcements of important discoveries would be branded as false and misleading if unfulfilled and all stock purchases made during the course of the research, if ultimately successful would be said to have been made with the advantage of inside information. If the only choices open to a corporation are either to remain silent and let false rumors do their work, or to make a communication, not legally required, at the risk that a slip of the pen or failure properly to amass or weigh the facts all judged in the bright gleam of hindsight will lead to large judgments, payable in the last analysis by innocent investors, for the benefit of speculators and their lawyers, most corporations would opt for the former. Cady, Roberts, supra. No. The two companies rushed in twenty-eight rigs, drilled about 200 wells, and began plant construction. ", Dr. Park, former Dean of the School of Earth Sciences at Stanford, admitted that K-55-1 was "an interesting one, a good one" but that there was not "any evidence at all for any discussion of extent, from one drill hole." Here, assuming that the Dow Jones reporter left the press conference as early as possible, 10:10 A.M., the 10-15 minute release (which took at least that long to dictate) could not have appeared on the wire before 10:22, and for other reasons unknown to us did not appear until 10:54. at 284, that Darke, after the drilling of K-55-1 had been completed and with detailed knowledge of the results thereof, told certain outside individuals that TGS "was a good buy." It was then said that, as of April 12, the release date, "* * * any statement as to size and grade of ore would be premature and possibly misleading." The Commission in that case also stated two truisms (1) that "it is extremely important that all facts relevant to an estimate of the value of such property be disclosed," and (2) that "the judgment of the `value' of this property is dependent upon the results of exploratory work * * *." The group included defendant Holyk, TGS's chief geologist, defendant Clayton, an electrical engineer and geophysicist, and defendant Darke, a geologist. Insider trading is trading of a corporation's stock or other securities (e.g. This report, after having been submitted to Mollison and returned to the reporter unamended on April 15, was published in the April 16 issue. 258 F.Supp. SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. [6]Defendant O'Neill did not appear to answer the charge against him; the SEC motion to enter a default judgment against him was denied without prejudice to its renewal upon completion of this appeal. Thus, anyone in possession of material inside information must either disclose it to the investing public, or, if he is disabled from disclosing it in order to protect a corporate confidence, or he chooses not to do so, must abstain from trading in or recommending the securities concerned while such inside information remains undisclosed. We hold only that, in an action for injunctive relief, the district court has the discretionary power under Rule 10b-5 and Section 10(b) to issue an injunction, if the misleading statement resulted from a lack of due diligence on the part of TGS. A statement relative to the extent of the discovery, in substantial part drafted by Mollison, was given to the Ontario Minister of Mines for release to the Canadian media. Although I see no reason why we could not affirm nevertheless, I am content to leave it for him to consider whether, although he has power to issue an injunction, there is equity in this portion of the bill. But even he did not act on the belief that the second press release had in fact reached the market, see 258 F. Supp. at 282. TGS experts could name very few base metal mines with a greater assay value and the court observed that bodies of much lower assay value were commercially mined, 258 F.Supp. When and how are promising results to be disclosed. They contend, however, that their purchases were not proscribed purchases for the news had already been effectively disclosed. 281. The speculator then examines the facts to discover and evaluate the risks that are present. 972, 978 (SDNY 1964); Miller v. Bargain City, U. S. A., Inc., 229 F.Supp. Counsel, David Ferber, Sol., Roger S. Foster, Sp. JM Quinn B, "SEC v Texas Gulf Sulphur" (SEC v Texas Gulf Sulphur . When drilling was resumed on March 31, hole K-55-3 was commenced 510 feet west of K-55-1 and was drilled easterly at a 45 angle so as to cross K-55-1 in a vertical plane. See 258 F.Supp. 1962); Stevens v. Vowell, 343 F.2d 374 (10 Cir. Visual estimates revealed an average content of 0.82% copper and 4.2% zinc over a 525-foot section. 853 (1909), the Rule is based in policy on the justifiable expectation of the securities marketplace that all investors trading on impersonal exchanges have relatively equal access to material information, see Cary, Insider Trading in Stocks, 21 Bus.Law. [14] The trial court found that defendant Murray "had no detailed knowledge as to the work" on the Kidd-55 segment. The number of possibilities for Congressional legislation and Commission rulings are legion. This core was unusually good in mineral content. From Texas Gulf Sulphur to Chiarella : A Tale of Two Duties 1968). TGS experts, on the other hand, denied at the hearing that proven or probable ore could have been calculated on April 11 or 12 because there was then no assurance of continuity in the mineralized zone. We are to put ourselves so far as we can in the position of the legislature that uttered them, and decide whether or not it would declare that the situation that has arisen is within what it wishes to cover. More important, however, is the realization which we must again underscore at the risk of repetition, that the investing public is hurt by exposure to false or deceptive statements irrespective of the purpose underlying their issuance. [35] Of course, even if TGS were negligent in not obtaining later data, a determination must still be made that the press release was misleading in light of this later information.

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